Notes From Underground: Feeding the Ducks When They Quack

Since the unemployment data, I have tried to write an appropriate blog but “all my words came back to me in shades of mediocrity” so I refrained from adding to the stream of vapid commentary that fills the Internet. But let’s proceed as the markets provided movement based on some sense of heightened inflation expectations. There is certainly money flowing into commodity based investments as OIL, COPPER, GOLD, and a litany of other natural resources have become a repository for money concerned with investments other than crypto currencies. The U.S. employment data was well within the range of expectations. The important average hourly earnings and the average work week were close to the consensus forecasts. The Canadian data beat estimates for the second consecutive month. The consensus was for an unemployment rate of 6% and addition of 2,000 jobs. The actual data was 5.7% unemployed and almost 80,000 new jobs, with two-thirds being part-time.

The Canadian dollar rallied more 1% as the market now anticipates that the BoC will be forced to mirror the FED in raising rates. The Bank of Canada has the privilege of focusing solely on the overnight interest rate since it never embarked on a QE, so it has no balance sheet to unwind. As commodity prices tumbled from 2014-2016, the Canadian economy slowed, the BoC lowered interest rates to 25 and 50 basis points, which caused the Loonie to depreciate by 45%. This allowed the Canadian economy to stabilize as its industries benefited from a very weak currency. Now that the Canadian economy has stabilized, employment is at record highs and the Bank of Canada will have to contend with an overheated real estate market due to foreign buyers and interest rates far too low for the economy’s strength. Watch the Canadian DOLLAR on the crosses as one of my favorite looking charts is the Canada/Swiss and euro/Canada. The Cad/Swiss weekly chart is very interesting as it appears to be gathering momentum. This is a very difficult CROSS to trade so use sizable corrections for the lowest risk entry levels against very well-defined support.

Speaking of the Swiss franc I want to go back to several posts I wrote in 2017 in which I presented the Swiss National Bank (SNB) with the ALCHEMIST AWARD for using its printing press to print Swiss francs in order to keep the Swiss weak against the euro. The SNB would sell francs into the market while purchasing EUROS and several other major currencies, swapping the newly minted currencies for global equities (ALCHEMY INDEED). The SNB announced today that it made a balance sheet profit of $55 billion on its portfolio, which is equivalent to 8% of the Swiss GDP. Yakov Smirnoff would say, “What A Country.” In a Dow Jones article by Brian Blackstone, he notes the SNB can’t sell stocks because it would result in a strengthening of the Swiss franc. The appreciation of global stocks has been a windfall for the SNB while the huge equity portfolio also provides a significant cash flow to the bank as it holds many dividend-paying stocks. (It is one of the largest holders of APPLE.) The SNB OUGHT TO BEGIN TO UNWIND SOME OF ITS GAINS OR AT THE VERY LEAST STOP THE PRINTING OF MONEY as at some point they will fall afoul of the IMF and other global actors.

The SWISS are a crypto-currency posing as a nation-state. I have included a chart of the SNB stock price since it’s a publicly held equity. You can draw your own conclusions about the power of the Swiss printing press. Creating value out of nothing indeed.

The EUR/CHF cross which has been the cause of the SNB policy is very close to the self-imposed 2015 floor of 1.20. I know that if the Swiss were to actually begin quantitative tightening by unloading some of its global equities the CAD/CHF cross will NOT WORK. I advise all to watch any sudden movement in the euro/Swiss cross as a signal that the SNB is shifting course. If I ran the SNB instead of Thomas Jordan I would be swapping out of equities and into a basket of hard assets, or diversification while the global ducks are quacking.

***Tuesday, the yield curves in the U.S. steepened as the long-end of the curve–30-, 10-year debt and the ultra-long bonds–all came under heavy selling pressure. As a result, there was enough concession for the three-year Treasury auction. Rick Santelli graded the sale an “A-” and he doesn’t grade on a curve. As the airwaves are filled with talk of incipient inflation it seems Bill Gross and others are announcing the end of the 35-year BOND BULL. The charts are certainly looking suspect on the 10- and 30-year Treasuries as the FED‘s balance sheet unwind accelerates and the ECB has reduced its monthly purchases to a “measly” 30 BILLION EUROS. There was also news out of Japan overnight that Japanese wages rose at a quickened rate, thus leading to an expectation that the BOJ would reduce its bond purchases.

The fact is the BOJ has already reduced its QE purchases. It owns the majority of all Japanese bonds so it can keep its Yield Curve Control (YCC) project in place with much less asset allocation. The YEN rallied in response against all major currencies as many market participants are short YEN believing the BOJ will be proceeding with QQE for longer than the other central banks. In my December 29 appearance with Rick I warned that the YEN short was a crowded trade and fraught with danger as the euro strengthening against the YEN was a problem for European exporters (think Mercedes/Lexus). The EURO/YEN cross strengthened by 10% in 2017 as Europe was the conduit for global money flows. So all of today’s news put pressure on the global bonds.

On Monday, I had my regular poolside chat with a group of successful “retired” business people where we discuss the world financial/political tapestry. They pinned me down and forced me to give them a target for my year-end close in the 10-YEAR TREASURY. So, in respect to one of the blog regular BIGMAN, I will state here that my year-end target is 3.4%. If I am correct I will buy the bottle of PAPPY VAN WINKLE to celebrate. My target is not based on inflation but rather on the incoming FED Chair Jerome Powell. In last weeks FOMC transcript from September 2012, the meeting results revealed that Powell was very uncomfortable with increasing the FED’S QE program because he worried about the size of the balance sheet and how would the FOMC be able to exit from the massive build-up of assets.

I think Chair Powell is still concerned about the size of the balance sheet and will be in favor of increased Quantitative Tightening while be careful to keep the fed funds rate around the zero real yield rate of 2%. This will lead to a STEEPENING of the 2/10 and 5/30 curves. It seems that Jerome Powell does not JUST LOOK AT MODELS BUT ACTUALLY ENGAGES MARKET PARTICIPANTS IN ORDER TO GET A SENSE OF MARKET SENTIMENT. Chair Powell will hear that many financial people are concerned about the recent flattening of the curve and will be RETICENT to raise the FED FUNDS rate pressuring a flatter curve. The continued large-scale asset purchases from other central banks provides an opportunity for the FED’s SOMA to offload more debt with less volatility, a classic case of FEEDING THAT DUCK MARIO DRAGHI WHILE HE IS QUACKING. Powell, please utilize PRAXIS (theory into practice). On Wednesday I will expound further on my STEEPENING scenario utilizing the fabulous piece from January 7 by Chris Whalen titled, “Bank Earnings and Volatility.”


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15 Responses to “Notes From Underground: Feeding the Ducks When They Quack”

  1. kevinwaspi Says:

    Yra, you surprise me again! Pappy Van Winkle? I thought you were a Scotch drinker, not a man weaned on Bourbon as I was!

  2. Mike Temple Says:

    So many things to discuss regarding SNB and CHF crosses.

    1. To your point that SNB should be selling stocks to buy hard assets, take a look at the ratio of CRB to SPX. Has plummeted “forever” to record lows in 2017. Curiously, it looks like the ratio has bottomed and “things”/CRB are beginning to rally despite the continued up trade in stocks.

    2. Rather than diversify or swap as you suggest, could SNB possibly continue to run the printing presses and simply buy those hard assets, rather than more AAPL et al?

    3. As many have begun to suggest, USD could really be heading for a bruising in 2018. If EUR powers higher to 1.30, how does SNB possibly keep the 1.20 EUR/CHF cross steady unless they stop their mad fiat creation scheme?

    4. “Everybody” is trying to figure out a cheap way to short S&P for what appears to be a challenging year which could possibly see a 1987-style crash. VIX contango makes calls rather expensive, and even S&P puts a pricey? Might not the CHF become the “cheaper” way to express a bearish bet on stocks? Shorting SNB stock also looks to be smart, but so much bigger liquidity available in CHF and options on it. After all, Japanese yen has “always” been a haven during “risk off” markets. Shouldn’t CHF ultimately exhibit that same tendency?

    5. If, instead, the CHF has become so grossly distorted that it loses this attractive power, does this not bolster the bullish case for gold in a “risk off” flash crash?

    6. You say we should watch the CHF crosses in reaction to what may come. Perhaps the Soros Global Macro Gang decides to come out of the shadows and actually “take on” the SNB who seem to be painting the self into a corner just as they did back in 2013 when the system/currency CRASHED in one 24 hour break. Is that so far fetched?

    7. I have a fascinating question for you and your readers regarding gold. Saw a remarkable chart which showed the number of trading days that gold closed in the various “hundreds” from Aug 2011 until Aug 2017 (the bear market) Total trading days is 2011 in that period. Over half of that time, gold traded between $1100 and $1399. The high was the “1900s” and the low was the “1000s”. Predictably, gold spent little time in the $1900s (1 day) and $1000s (62 Days, Roughly)

    Yet, 62 Days in the $1000s is not the 2nd lowest period!

    Which hundred dollar price period had even fewer trading days and how many? It is fascinating.

    8. If one of the features of the reality distortion effects of all this CB QE has been the systemic and historic flattening/pancaking of VOL in VIX, bonds and gold, shouldn’t the quiescence of the CHF be subject to another violent move as 2018 unfolds?



  3. David Richards (@djwrichards) Says:

    On the other hand, CAD is the most indebted nation in the household sector, and its banks’ assets rest on a house-of-cards housing bubble, both of which dwarf the 2005-07 mania in US housing/debt.

    Japan is perhaps more compelling… an awakening sleeper?

    The Swiss should be internationally sanctioned as currency manipulators. What a farce to pin that label on China. It’s like how when CNH fell 3% in summer 2016, it was called “devaluation”, but when JPY was intentionally pushed down 40% a la Abenomics, it was applauded as bold and prudent…. lol

  4. David Richards (@djwrichards) Says:

    Looking at the dollar pattern, is it going to be more like 1994+ or 1997+. If the Powell Fed does not hike at least 4 times this year AND cut the balance sheet some, then it’s probably more like 1994 (dollar crash in progress).

    Inverting yield curve is a price to pay when you’ve already had a collapsing currency for a year and signs of very strong inflation emerging from the commodity sector. Better an inverted yield curve than price riots in the streets. Historically, inflation tears apart a society more than a bit of unemployment and a stock market correction.

    Besides, the FED can resist the yield curve inverting by aggressively selling its grotesque stack of long Treasuries, rather than by refusing to hike short-term rates. To hell with the rich guys’ stock portfolio.

    • David Richards (@djwrichards) Says:

      With the 10yr suddenly pushing near 2.6% (hat tip to China) and USD plunging again, the Fed can/should hike rates immediately with less worry now about it inverting the yield curve or creating a “strong dollar”. Chinese “communists” front-run the Fed, haha.

      Push down stocks too as just punishment to those sneaky Swiss.

  5. asherz Says:

    Yra- “If I ran the SNB instead of Thomas Jordan I would be swapping out of equities and into a basket of hard assets, or diversification while the global ducks are quacking.”
    I’d love to know what those “hard assets” are. Real estate first comes to mind. The building I live in had construction begin in 1929 and was supposed to be a cooperative. It was completed in 1932. It became a rental. It didn’t coop until 1959, 30 years later for obvious reasons.
    Paintings? Rare wines? Antique autos? Other less volatile stocks?
    We all know what the answer is. A commodity that has been hard for 5000 years and whose price has been suppressed by those who would have us believe that fiat currency and God can be trusted. Associating the latter with the former does not add to our comfort.
    Apple and the next 100 story building on 57 Street will have the same result when asset inflation comes to its inevitable result.

  6. Michael A Temple Says:

    Interesting article about CHF/EUR
    Kudos to Yra…You got there first

  7. Henry CHAN Says:

    Great disposition on SNB. Like to have their “problem!”

    I started reading your blog after Bob Dunn recommended you.

    How do we ,as traders, benefit from trading the Swiss? Which crosses are most revealing?

    Sent from my iPad


    • yra harris Says:

      Henry–not easy to answer this as the relationship is very dynamic.Today we saw the Swiss return to its status as a haven as the uncertainty of the Chinese rumor on treasury purchases provided fear in the markets.Coupled with the rumor from reuters about U.S. leaving Nafta the Swiss was bid all day—but I trade a great deal of Swiss and watch it closely so I try to cover it .My readers were very attuned to the events of january 15h,2015 when I had blogged several times from mid -December thru early januray that the PEG to the Euro could not hold–even did a Santelli in late December predicting something big was to happen–scroll through the archives and you will find it

  8. rld Says:

    I love reading your postings, and always learn a lot. Thanks!
    BTW – It will be interesting to watch the bid to cover ratios on the results of the longer term (10/30) T-Bond auctions over the next few offerings…

    • yra harris Says:

      rld—very well done as today’s 10 year auction provided the support to this market —now on to the 30 year

  9. Stefan Jovanovich Says:

    I will try to fill the mediocrity deficit by offering some commonplace historical observations and an idiot question.
    From the point of view of domestic depositors, there are no central banking systems that have any present risk of “collapse”. The regular worry of people in the 18th and 19th centuries was whether their “money” in the bank could, in fact, be converted into actual legal tender, on demand. That is no longer the case. Everyone with money lives in Bagehot world now. No one, even in Zimbabwe, has to be concerned about whether or not they can cash a check and receive official pieces of paper.
    The key question for all financial intermediaries is no longer whether or not paper can be converted into specie; it is at what price will one virtual denomination can be exchanged for another. No wonder FX now dominates the trading volumes of the money/credit arrangments of the world. In a money/credit system where every issuer of legal tender now follows the Lombard Street rule, central bank solvency is a question only for the trade/current account deficit countries that cannot pay their bills using their own currencies – Venezuela, to take the most obvious example. But, for the currencies of the countries that maintain positive external balances, does it still matter what their internal leverage is?

  10. kevinwaspi Says:

    Stefan Jovanovich,
    I agree with your observation on the present state of acceptance of the fiat currency world we live in. I take exception to the conclusion that you’ve alluded to in the use of Japan, and their internal leverage and extending that to the rest of the world. It is impossible for every country to have a surplus in trade, or have the ability to finance itself internally. The Asian culture has a thousand years of the habit of thrift that western civilizations do not share. Like Venezuela, leverage doesn’t matter…… until it does. It reminds me of one of my favorite Ernest Hemingway lines in The Sun Also Rises, “How did you go bankrupt?” Two ways. Gradually, then suddenly.”

  11. Stefan Jovanovich Says:

    If this were a high school band, they would have me playing the triangle. My one note contribution is that internal leverage does not matter if the country or currency bloc has no need for foreign currency to clear its current and trade account balances. If Japan and China end up with U.S. dollar reserves in excess of their current account surpluses with the U.S., it is because their central banks have to accept some form of payment when they sell against their own currencies in the FX markets in order to “manage” their terms of trade.

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